Reference no: EM132289422

You start a t-shirt business, where you sell blue and red shirts. There is a steady demand for 200 blue shirts per year and 100 red shirts per year. Supplier 1 will sell you shirts of either color at $4 each and will charge an additional $1600 to set up an order regardless of the quantity and color(s) of shirts purchased. Supplier 2 only stocks red shirts and sell them for $3.60 each, and charges an addition $80 to set up an order. Order fulfillment isn’t immediate and orders from either supplier take 1 year to arrive. All demand must be fulfilled. Assume a 16% annual interest rate.

(a) If you were to decide to order each color of shirt from the cheapest supplier, how many blue shirts should you request per order, how often would you place an order for blue shirts, and at what inventory level of blue shirts should each order be placed?

(b) Under the same strategy given in part (a), how many red shirts would you request per order, how often should you place an order for red shirts, and at what inventory level of red shirts should each order be placed?

(c) If you decide to order all your shirts from the same supplier, allowing you to place orders containing both colors of shirts (while still only paying one setup cost per order), how many shirts should you request per order, and how often would you place an order?

(d) Under the strategy given in part (c), what fraction of shirts per order should be blue, and what fraction should be red? Hint: this should be an easy problem; ignore rounding issues and don't overthink it!

(e) Determine which approach is cheaper (ordering from the cheapest supplier, or ordering from the same supplier), and by how much.

Hint: don't forget to consider purchasing costs.